US senators have been working toward a compromise on competing internet-tax bills

By BBC News Online's North America Business Reporter, David Schepp

US lawmakers have been busy since February trying to hammer out a deal to keep a lid on internet sales taxes.

In recent weeks it appeared legislation that would allow states to start collecting online sales taxes might makes it way through.

Confusing local tax laws prove to be a burden for online retailers

But the plan has stalled after Senate members deadlocked over how to proceed, following objections by business groups that any legislation should require states to revamp their tax laws.

"Right now there's so many varying tax laws and little nuances, that it makes it really difficult for anyone to collect taxes across state borders," says Heather Dougherty, retail analyst for Jupiter Media Metrix.

Confusing tax codes

Retailers say that, with nearly 7,500 local taxing authorities, charging customers the right tax is an overwhelming task.

Indeed, in 1992 the Supreme Court agreed with retailers when it ruled that the numerous levies present an unreasonable burden on interstate commerce.

Ms Dougherty adds, however, that states are anxious to move forward with reforms so that they can begin to start collecting on lost revenues.

Senate Majority Leader Tom Daschle will eventually oversee the passage of any internet tax bill

Currently, 29 states are seeking to simplify tax codes so they can collect sales taxes on e-commerce transactions.

Before the advent of the internet, it was cataloguers who sought a moratorium on sales taxes as a way to steer clear of myriad tax codes.

When e-commerce developed on the internet, the tradition was drafted to online sales, too.

States continue to argue that they are losing millions in revenue by not being permitted to tax purchases made over the internet and through cataloguers.

An unfair advantage

Aside from states' concerns over lost tax revenue, some bricks-and-mortar retailers say that internet retailers have an unfair advantage on price.

But Jupiter's Ms Dougherty told BBC News Online that really is not the case, especially given the recent rout in tech stocks and subsequent failure of many dot.com businesses.

"There aren't really many of them are left," she says. "This will help some of the retailers continue to be competitive on price.

"But this is really about making sure the big guys - Wal-Mart, The Gap - flourish," she says.

Under the current system, many larger, well-known businesses set up separate business units to handle e-commerce transactions.

That separation allowed them to escape charging sales taxes in those states where the firms don't have any operations, such as retail outlets or warehouses.

But that separation has a cost, Ms Dougherty says, and efficiencies could be found if a company was able to combine some aspects of their businesses.

House weighs in

On Wednesday, US House of Representatives majority leader Dick Armey said he would seek a short-term ban on internet sales tax, continuing the ban that has been in place since 1998 and due to expire in October.

"We would only get a short-term limit on that," Mr Armey said, adding that he is also seeking a ban on sales taxes for the next three to five years.

Through a spokesman, the Texas lawmaker said that any ban on internet sales taxes would likely resemble the current ban.

"I don't think the language is going to be different from the last," the spokesman said. "I don't think it needs to be."

He added that states are already prohibited from collecting sales taxes on online purchases unless Congress gives them specific permission to do so.

Under the Senate's proposed legislation the current moratorium on sales taxes would last until 2006